INTRODUCTION .

According to Sri Lanka Tourist Board statistics the employment generation is over 150,000 and with the current arrival trend this is expected to shoot up to 600,000 by 2016. With the average tourist arrivals which is around 425,000 to bring in a revenue around US $450 million. Therefore, we will have many opportunities in Sri Lankan hotel sector in future. This hotel project is related to Trincomalee and there are many advantages can gain to investors due to rapid development of Sri Lankan Economy. Therefore this will be a great opportunity to investing there.

ADVANTAGES OF BUILDING A HOTEL IN TRINCO

y Cost of labour is low y Cost of food item is low e.g fish y Geographical locations y Competitive advantage due to minimum hotels

PROPOSING A RELEVANT ORGANISATION STRUCTURE FOR THE HOTEL

General Manager

Front office manger

Accounting manager

F&B manager

House keeping Manager

Excecutine cheff

Maintainance manager

HR & Administartion

Receptionist

Assistance accountant

Assistance resturent manager Resturent supervisor

Excecutine

Saue cheff

Miantainance excutive

Bell man

Accountant clark

Supervisor

Cheff departiche

Garderner

Plumber

Stuwarts

Room Boy

Cook

Life guard

Animator

Comice 1

comise 2

Electrecient

comise 3

GENERATING THE RELEVANT CASH FLOW STATEMENTS FOR 10 YEARS Generating Cash In-Flow Room Rates Room rates are taken as compare to the Nilavali Beach hotel. The rates are taken as average figures of the room charges. The half-board and Full-board method was negligee by the writer and room rates are taken as Stranded and Deluxe. The following table is shown the used techniques to generate the cash flow for first five years.
Table 1

Calculation the Revenue for first 5 years Stranded A/C room

Single Rooms Room Rates Occupancy Rate Revenue per day Revenue per year Revenue for 5 years Total Revenue for first 5 years 30 8000 65 156000 56940000 284700000 Double 60 11000 65 312000 113880000 569400000 Triple 40 16000 65 208000 75920000 379600000 1,233,700,000

Studio Deluxe Rooms

single Rooms Room Rates Occupancy Rate Revenue per day Revenue per year Revenue for 5 years Total Revenue for first 5 years 20 18000 65 234000 85410000 427050000 Double 35 20000 65 195000 71175000 355875000 Triple 15 23000 65 523250 190986250 954931250 1,737,856,250

Stranded A/C room Revenue for first 5 years Revenue for 1 year

Studio Deluxe Room

Total Revenue

1233700000 246740000

1737856250 347571250

2971556250 594311250

According to the following table you can identify how we generate room rates for next five years
Table 2

Calculation the Revenue for Next 5 years Stranded A/C room Single Double 30 60 10000 13750 65 65 156000 312000 56940000 113880000 284700000 569400000

Rooms Room Rates Occupancy Rate Revenue per day Revenue per year Revenue for next 5 years Total Revenue for first 5 years

Triple 40 19200 65 208000 75920000 379600000 1233700000

Rooms Room Rates Occupancy Rate Revenue per day Revenue per year Revenue for 5 years
Total Revenue for first 5 years

Studio Deluxe Rooms single Double 20 35 22500 25000 65 65 292500 243750 106762500 88968750 533812500 444843750

Triple 15 28750 65 654062.5 238732813 1193664063 2172320313

Stranded A/C room Revenue for first 5 years Revenue for 1 year

Studio Deluxe Room

Total Revenue

1233700000 246740000

2172320313 434464063

3406020313 681204063

To generate the room charges for second five years, main assumption was room charges are increased by 25% per year. The following table is shown the room charges of Nilavali Beach hotel. When I generate the revenue the following figures are considered in average way.
Table 3

Standard A/C Rooms Single Half Board Full Board 7,750 9,000 Double 10,500 13,000 Triple

Studio Deluxe Rooms Single Half Board Full Board 11,750 13,000 Double 14,500 17,000 Triple 18,750 22,500

14,750 18,500

(http://www.tangerinehotels.com/index.php?option=com_content&view=article&id=79&Itemid=94)

Occupancy Rates
The occupancy rate is taken as 65% around the 10 years time period. The occupancy rate in North East is 70% in Sri Lanka. (Key Statistical Indicator Sri Lankan Tourism 2010). Here we are generating a forecasted cash flow. Therefore, I have considered the occupancy rate as 65% because it can be vary from year to year. But there is a great possibility to increase the rate during next ten years.

Generating Cash Out-Flows Mainly four types of costs are considered for the project including; y y y y Administration cost Salaries and wages Sales promotions Maintenance cost

Then the Administration cost was taken as 60% of the cost of sales because when we compare the administration cost of reputed hotels in Sri Lanka Like Tangerine Hotels PLC it was closed to 50% to 65% of them. Therefore, the writer has taken

60% for administration cost of total expenses. Cost like, food & beverage, electricity, telephone etc are included in to administration cost.

Salary and wages were taken as 25% of total expenses because many reputed hotel in Sri Lanka like tangerine hotel PLC the maintenance cost was closed to 20% to 30%. To generate the cash flows for ten years this assumption was used by me. Maintenance cost was taken as 9% of the cost of sales because when compare to Sri Lankan reputed hotels it was close to 8% to 10% like Tangerine Hotel PLC. Therefore, maintenance cost was considered as 9% of total cost.

Sales & promotion cost was taken as 6% of the cost of sales because when compare to Sri Lankan reputed hotels it was close to 5% to 08% like Tangerine Hotel PLC. Therefore, maintenance cost was considered as 6% of total cost.

Table 4

Calculation Expenses (out flow) for 10 years Year

1 2 3 4 5 6 7 8 9 10

Administration Cost 142634700 156898170 172587987 189846786 208831464 229714611 252686072 277954679 305750147 336325162

Salaries & Wages 59431125 65374238 71911661 79102827 87013110 104415732 125298879 150358654 180430385 216516462

Sales & Promotion 21395205 23534726 25888198 28477018 31324720 34457192 37902911 41693202 45862522 50448774

Maintenance Cost 14263470 15689817 17258799 18984679 20883146 22971461 25268607 27795468 30575015 33632516

Total Expenses 237724500 261496950 287646645 316411310 348052440 391558996 441156468 497802003 562618069 636922914

Main assumption on calculation expenses

Table 5

Calculation of Expenses
Average revenue Total expenses are considered as 40% of revenue Administration is considered as 60% of the Expenses Salary is considered as 25% of the Expenses Sales is considered as 09% of the Expenses Maintenance is considered as 06% of the Expenses 594311250 237724500 142634700 59431125 21395205 14263470

The above table is shown you the assumptions which I have used to generate the expenses related to the forecasted cash flows. By going through the annual reports of Sri Lankan reputed hotels like Tangerine Hotels Plc , Continental Hotel Plc these assumption was generated by me.

PROJECTED CASH FLOWS FOR 10 YEARS TIME PERIOD Profit before interest and tax
Table 6

Cash Flows for 10 years time period

Year INFLOW
Revenue Administration cost

OUTFLOW
Salaries & wages Sales & promotions Maintenance cost

PBIT

1 594,311,250 2 594,311,250 3 594,311,250 4 594,311,250 5 594,311,250 6 681,204,063 7 681,204,063 8 681,204,063 9 681,204,063 10 681,204,063 336,325,162 216,516,462 24,523,346 16,348,898 305,750,147 180,430,385 24,523,346 16,348,898 277,954,679 150,358,654 24,523,346 16,348,898 252,686,072 125,298,879 24,523,346 16,348,898 229,714,611 104,415,732 24,523,346 16,348,898 208,831,464 87,013,110 21,395,205 14,263,470 189,846,786 79,102,827 21,395,205 14,263,470 172,587,987 71,911,661 21,395,205 14,263,470 156,898,170 65,374,238 21,395,205 14,263,470 142,634,700 59,431,125 21,395,205 14,263,470

356,586,750 336,380,168 314,152,927 289,702,962 262,808,001 306,201,476 262,346,868 212,018,486 154,151,287 87,490,195

The above table is shown us the behaviour of profit before interest and tax. After that we must deduct the interest and tax expenses. Then following table is shown the profit after interest and tax.

Profit after interest and tax

Table 7

Interest and Tax Expenses Year PBIT Interest Profit after Interest Income Tax Expense 15% TDL 1% Net Profit

1 2 3 4 5 6 7 8 9 10

356,586,750 336,380,168 314,152,927 289,702,962 262,808,001 306,201,476 262,346,868 212,018,486 154,151,287 87,490,195

44,000,000 44,000,000 44,000,000 44,000,000 44,000,000 44,000,000 44,000,000 44,000,000 44,000,000 44,000,000

312,586,750 292,380,168 270,152,927 245,702,962 218,808,001 262,201,476 218,346,868 168,018,486 110,151,287 43,490,195

46,888,013 43,857,025 40,522,939 36,855,444 32,821,200 39,330,221 32,752,030 25,202,773 16,522,693 6,523,529

5,943,113 5,943,113 5,943,113 5,943,113 5,943,113 6,812,041 6,812,041 6,812,041 6,812,041 6,812,041

259,755,625 242,580,030 223,686,875 202,904,405 180,043,688 216,059,214 178,782,798 136,003,672 86,816,553 30,154,625

The tourism development levy was considered as 1% per year. The Income tax expenses are considered as 15% per year. (www.sltda.lk/cost) The above table is given you a clear picture of generating the net profit after interest and tax. Interest rate is considered as 12% per year (Central Bank Report 2010). Following Table is shown how I calculated the interest.

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Table 8

Bank Interest Rate Calculation

Bank Loan Amount Bank Interest per year Bank Interest for 10 year Total amount to pay Therefore, Interest per month 200000000 x 0.12 24000000 x 10 200000000+216000000 416000000/10 200000000 24000000 240000000 440000000 44000000

GP Ratio and NP Ratio Analysis

Year
1 2 3 4 5 6 7 8 9 10

PBIT 356586750 336380167.5 314152926.8 289702961.9 262808000.6 306201475.9 262346868.4 212018485.5 154151286.8 87490195.07

Net Profit 259755625 242,580,030 223,686,875 202,904,405 180,043,688 216,059,214 178,782,798 136,003,672 86,816,553 30,154,625

Revenue
594,311,250 594,311,250 594,311,250 594,311,250 594,311,250 681,204,063 681,204,063 681,204,063 681,204,063 681,204,063

GP Ratio 0.60 0.57 0.53 0.49 0.44 0.45 0.39 0.31 0.23 0.13

NP Ratio 0.44 0.41 0.38 0.34 0.30 0.32 0.26 0.20 0.13 0.04

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NPV ANALYSIS

The following table shown is NPV analysis of the particular project. According to net income the investment can recover from less than 3 years. But we can not say yet. Because of the time value matter. Therefore, we must calculate the time value of money. Therefore, after calculating the time value of money we can recover of investment after 4 years and 10 months time.
Year net cash inflow Discount rate @ 15% NPV Cumulative cash flow

1 2 3 4 5 6 7 8 9 10

259755625 242580030 223686875 202904405 180043688 216059214 178782798 136003672 86816553 30154625

0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247

225,874,457 183,425,353 147,077,751 116,011,252 89,513,533 93,408,361 67,211,076 44,459,842 24,678,683 7,453,762 999,114,069

225,874,457 409,299,810 556,377,561 672,388,814 761,902,347 855,310,707 922,521,783 966,981,624 991,660,307 999,114,069

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CONCLUSION

We can recover our investment with 3 years time period according to the initial cash flow. But we can not recommend yet because of time value matter. Then I have fond the time value of money and then I find we can recover our investment within 4 yeas and 10 months time.

By looking at that we can have Rs 999,114,069 after 10 years time periods. Therefore, the hotel project will generate Rs 299114068 profit after ten years time period ( 999114069 700000000). Therefore, Mr. Romash can go-ahead with the Hotel project in Trincolmalee. As well as he can earn this initial capital investment after 4 years and 10 months time.

It has higher NPV than the project. Therefore, the project will be very worth wile and you can start the project and I can recommend you to go through with the project.

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RECOMMENDATIONS When you go through with the forecasted profits of the cash flow you will see there is a decreasing manner. It was due to my assumption on occupancy rates and other cost factors. y I have assumed the occupancy rate as 65% around the 10 years time period. Practically it wont be like that. Next decade of Sri Lankan Tourism the occupancy rate may be increased to 90%. There are many reasons for that. Therefore, we have another 35% to increase. If we can do it we will have more and more profits. y When we consider the expenses side we should always try to reduce the Administration cost and other waist. I have assumed administration cost will increase 10% per year. But if we can reduce it 1% per year it will be a help to increased the profit. y Then we talk about the room rates it was the main factor to increase the revenue. My assumption was room rates incensement was 25% after 5 years time. Most of time after ten years time it can be increased by 50% compare to todays charge of a room. So we can increase the profit definitely. y Any way this hotel project is a very worth will project to you to generate more profit. Therefore, by investing on it you can earn more and more profit in future.

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REFERENCES y Glautier,M. W. E and B. Underdown Accounting Theory and practice (2002); Harllow: Financial times Prentice hall; 2nd edition y
y

www.sltda.lk/cost
http://www.tangerinehotels.com/index.php?option=com_content&view=article &id=79&Itemid=94

y y y

Tangerine Hotels PLC (2010) Central Bank report (2010) Key Statistical Indicator Sri Lankan Tourism (2010)

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